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World Bank cuts GDP growth outlook for Philippines

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June 8, 2021
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The Philippines should ramp up its mass vaccination rollout to boost consumer and business confidence, the World Bank said. — PHILIPPINE STAR/ MICHAEL VARCAS

By Beatrice M. Laforga, Reporter

THE World Bank slashed its Philippine growth outlook for this year to 4.7% as it expects a “fragile and challenging” rebound amid a resurgence in coronavirus disease 2019 (COVID-19) infections, renewed lockdowns and worsening poverty. 

In its Philippines Economic Update released on Tuesday, the multilateral lender cut its 2021 gross domestic product (GDP) growth projection again from 5.5% in March and the 5.9% forecast given in January.

While the World Bank’s latest projection is a reversal of the record 9.6% contraction in 2020, it is still lower than the government’s GDP growth target of 6%-7%.

Kevin C. Chua, a World Bank senior economist, said the GDP estimate for the Philippines was lowered after a larger-than-expected 4.2% economic contraction in the first quarter and the reimposition of tighter quarantine restrictions in the capital region in late March.

“However, the recovery remains fragile and challenging given the continuing threat — the pandemic — on the country’s health system, the lives and livelihoods of Filipinos and the vitality of the economy,” he said at an online briefing on Tuesday.

A spike in COVID-19 cases in March prompted stricter lockdown curbs in Metro Manila and nearby provinces until mid-May.

Restrictions have been eased since then as new infections fell significantly from the peak. On Tuesday, the Health department reported 4,777 new infections, bringing the number of active cases to 56,452.

The World Bank expects the government’s mass vaccination program to gain traction in the second half, which will help boost consumer and business confidence and domestic consumption.

“The growth prospects hinge on the country’s ability to manage the COVID-19 health crisis, the medium-term growth trajectory depends on effective pandemic containment delivery of mass vaccination and further loosening of mobility restrictions,” said Mr. Chua.

The World Bank lowered its growth forecast for next year to 5.9% (from 6.3% in March) and to 6% in 2023. This is still lower than the government’s 7-9% growth targets for 2022 and 6-7% in 2023.

The latest projections will bring the World Bank’s estimated growth for the Philippines to 5.7% over 2020-2029, but Mr. Chua said this is partly because 2021-2022 are coming from a low base last year.

“Economic growth is expected to recover in the medium term for the Philippines because of the improvement in the external environment and the projected return of domestic activity,” Ndiame Diop, World Bank country director for Brunei, Malaysia, the Philippines and Thailand, said during the briefing.

Mr. Chua said a strong rebound in the country’s major trading partners such as the United States and China could buoy Philippine exports and remittances. However, the multilateral bank warned that the country lags in leveraging foreign investments after the pandemic because of its restrictive foreign policies.

The base effect coming from the deep contraction in 2020 will also contribute to this year’s growth while the national elections in May 2022 could stimulate economic activity towards yearend, the World Bank said.

Market uncertainty and muted bank lending could temper investments from the private sector.

Mr. Chua said another wave of COVID-19 cases poses a major risk to the Philippine economy since this could threaten the healthcare system.

A possible delay in the arrival of vaccines could also dampen the outlook for the Philippines, along with other external risks such as a slower global economic recovery, disruptions in international value chains and trade protectionism.

While it is crucial for the government to prioritize pandemic containment and the vaccination program, Mr. Chua said effective rollout of social protection programs such as direct cash aid to poor families will help prevent the long-term adverse effects of the pandemic on human capital.

“COVID-19 pandemic-related shocks, including hunger incidences have manifested in higher levels of childhood malnutrition, especially among the poor. It is important to reduce the extent of these losses and mitigate the shocks from resulting in a persistent impact on wellbeing in future economic opportunities. Social programs including cash transfers can help alleviate food in subsistence conditions,” he said.

Since the government’s fiscal space has narrowed with the sustained high expenditures and weak revenues, Mr. Chua said government spending should be efficient and targeted.

The state must also pursue fiscal consolidation in the medium term by improving tax administration, ensuring that all expenditures have meaningful impact on the economy, and possibly raising taxes, the economist said.

POVERTY
The World Bank estimated the country’s poverty rate, or the share of the population living with less than $3.20 a day, will increase by 1.4 percentage points to 21% in 2020 from 16.7 in 2018.

This meant two million more Filipinos slid into poverty last year from 2018 levels, even after considering the impact of government subsidies.

“The reimposition of stricter quarantines risks poverty further. However, if wage and nonfarm employment increase with an anticipated GDP growth and inflation (remains) stable, the poverty rate will likely decline back to 2018 levels by 2021 and maintain a downward trend through 2022,” Mr. Chua said.

The multilateral bank said the quality of jobs being created remain a concern despite signs of recovery in the labor market as the share of wage workers dipped while the proportion of self-employed and nonpaid workers increased.

MANDANAS RULING
Amid limited fiscal space and uncertainties over service delivery, the World Bank cautioned Philippine authorities to “prudently manage institutional changes” when the Mandanas ruling is implemented next year. This means the share of local government units (LGUs) from national tax collections, or their internal revenue allotment (IRA), will increase.

IRA of LGUs could spike by 55% to 1.08 trillion in 2022, prompting the National Government to devolve some of its functions.

“While the Mandanas ruling provides an opportunity to strengthen decentralization, a poorly managed implementation of the Mandanas ruling represents a significant risk to local development. In particular, local governments are likely to face issues on weak budget execution, while the transition towards re-devolution could lead to gaps in service delivery,” the bank said in a special chapter of the latest report.

Short-term and long-term policies should be rolled out to manage the transition and address implementation challenges, it said.

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